Dollar retreats

The Trump tariffs-fuelled rally in the dollar stalled yesterday with the currency seeing a modest decline. The euro and sterling gained around a half and three-quarters of a cent respectively – with rising Euro area and UK bond yields providing some support – and are trading at around $1.0370 and $1.2450 this morning, leaving EURGBP a touch softer at about £0.8325. Today the focus will be on the latest CPI inflation data (for January) in the US.

Government bond yields backed up yesterday. German and UK 2-and 10-year yields increased by around 5-7bps, reversing a good portion of last week’s decline, while equivalent US yields were 2-4 bps higher. In equity markets, European stocks added to Monday’s gains, up another 0.5% or so, while the S&P 500 in the US ended broadly flat on the day.

Fed Chair Powell’s testimony to the US Senate Banking Committee was largely as expected. He said “with our (monetary) policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry” to lower interest rates again (having cut them by 100bps between September and December last year).

European Commission President Ursula von der Leyen says she regrets the US decision to impose tariffs on European steel and aluminium exports, but warns that they will “trigger firm and proportionate  countermeasures.”

Today’s CPI report in the US is expected to show headline and core consumer prices both rose by 0.3% in January (from December) according to the consensus forecast, which would leave the annual rate of headline inflation unchanged at 2.9% but would see the core inflation nudge down to 3.1% (from 3.2%).